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09 Aug 12 Right to acquire options arose on commencement of employment - McWilliam

The Full Federal Court (Edmonds, Jagot and Robertson JJ) has dismissed the Commissioner's appeal from the decision of the AAT in Taxpayer and FCT [2012] AATA 142.

The Commissioner considered that the taxpayer adopted the wrong date as the date on which he acquired certain options to purchase shares in Seven Network Limited, a public company, and hence the date at which the “discount” included in his assessable income ought to be calculated under the former s 139CC of Division 13A of ITAA 1936. The taxpayer’s position is that the relevant date was 1 July 2003 (when he commenced employment with Seven Network Limited), whereas the Commissioner considered the correct date was 22 December 2003 (when the options were granted) or alternatively 28 November 2003 (when the grant of the options was approved by the shareholders of Seven Network Limited).

The Commissioner issued an amended assessment which included an additional $443,500.00 in the taxpayer’s taxable income for the year ended 30 June 2004 and imposed a tax shortfall penalty of 5%. The additional tax was attributable to a movement in the share price of Seven Network Limited between the date asserted as the date of acquisition by the taxpayer and the date adopted by the Commissioner.

The AAT set aside the Commissioner's decision under review, on the basis that the relevant date was 1 July 2003, being the date on which the taxpayer commenced employment with Seven Network Limited. The Full Federal Court agreed.

The Commissioner submitted that the relevant right for the purposes of s 139B(1) was a right to acquire shares and not just any right, legal or equitable, that might arise prior to the creation or grant of a right to acquire shares.

The taxpayer submitted that the appeal was moot because there were findings unchallenged by the Commissioner on appeal that he acquired a right to acquire shares in Seven Network Limited on 1 July 2003. On this basis he submitted that the appeal was incompetent as not being on a question of law. The taxpayer also submitted that the distinction which the Commissioner sought to draw between the alleged “anterior” right to acquire options to be issued and the grant of options themselves was artificial and of no consequence in the context of s 139B.

The Full Federal Court accepted the taxpayer’s submission that the appeal began and ended with the AAT's unchallenged findings that the taxpayer had acquired the options themselves as at 1 July 2003. The effect of this finding was to defeat the Commissioner’s appeal by rendering the construction question immaterial. This also involved the consequence that the appeal was incompetent as not being on a question of law.

Assuming that to be wrong, the Full Federal Court went on to consider whether the taxpayer acquired a relevant "right" on 1 July 2003. The Full Federal Court concluded, at para 84:

"The statutory language does not support the Commissioner's distinction between an interest in the relevant right (the right to acquire shares) and an interest in an anterior right (the right to require the employer to provide the shares). No uncertainty as to the taxing point thereby arises. No difficulty with valuation arises: see s 139FF. Nor does any policy consideration assist the Commissioner. By virtue of s 139C(4) no double liability arises because a taxpayer does not acquire a share under an employee share scheme if the taxpayer acquired the share as the result of exercising a right the taxpayer acquired under such a scheme."

Accordingly, the Commissioner's appeal was dismissed with costs: FCT v McWilliam [2012] FCAFC 105 (Full Federal Court; Edmonds, Jagot and Robertson JJ; 8 August 2012).


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